Rating agencies react negatively to AIG’s reserve charges and strategic plan

The big reserve addition mainly reflects adverse development on prior accident years in longer-tailed lines of business. Moody's went a step further and actually downgraded the financial strength rating of the insurer's property & casualty units in the US and Canada to A2 from A1. AIG bosses may have hoped that the scale of the reserve addition would have slipped under the radar as they made further big changes to the company as part of its latest strategic review under shareholder pressure.hideHigh profile activist investor Carl Icahn has publicly called on AIG to break itself up into three separate units in order to avoid being classified as a Systemically Important Financial Institution (SIFI) and thus avoid what he deems to be unnecessary capital charges. AIG non-executive chairman Douglas Steenland announced earlier this week that he and the board support CEO Peter Hancock's view that a full break-up is not needed. But the pair did announce a number of big strategic changes that came as close to meeting Mr Icahn's demands as possible without caving in. The insurer's embattled leadership announced plans to return at least $25bn of capital to shareholders over the next two years and execute an IPO of up to 19.9% of United Guaranty Corporation, as well as other sales such as AIG Advisor Group. It has also committed to a cost-cutting programme designed to realise $1.6bn in two years and a plan to reduce its commercial P&C accident year loss ratio by six points by 2017. Mr Steenland and Mr Hancock also revealed a new structure based on nine 'modular' business units that would make them more clearly accountable and fit to be sold off if it makes sense in the future "The reorganisation will give AIG options to retain and grow the businesses, or take public or sell the units if they don't adequately contribute to financial targets, or if it becomes apparent that they are worth more outside of AIG than within, or if they represent an efficient means of returning capital to shareholders," stated the company. "The company could consider the separation of even the larger modular units of its commercial and consumer segments over time," added the group. This clearly represents a big change for AIG. Staff, shareholders and customers will watch developments closely. While all this strategic change may be grabbing the headlines, corporate risk and insurance managers will also need to closely watch the reserve developments. The credit rating agencies are obviously watching them too and responded quickly to the announcements this week. AM Best noted that, while the reserve actions are spread across a number of accident years, it is 'concerned' that approximately 41% of the strengthening relates to 2011-2013 accident years. Favourable or modestly adverse development had been previously reported for these years and the 2014 accident year, stated the credit ratings agency. "The total amount of the deficiency reported exceeds AM Best's assumptions of loss reserve deficiency, excluding the reversal of statutory discounts of reserves for workers' compensation," it explained. "The under review status also considers the potential impact on the business profile and future earnings capacity of AIG of the strategic actions being taken by management to improve profitability and efficiency and maximise shareholder value," added the ratings agency. S&P revised its outlook on AIG Inc, AIG's holding company, to negative from stable and affirmed its 'A-' long-term counterparty credit rating. In addition it affirmed its 'A+' financial strength ratings on AIG's core operating insurance companies. The outlook is stable. S&P said that the revised outlook for the holding company reflects the potential for weaker earnings because of the planned divestiture of United Guaranty Corporation and reduced investment income as capital is returned to shareholders. Another factor for S&P is the lack of improvement in projected interest expense in 2016 and 2017 as the benefits from past re-financings of higher coupon debt are offset by higher financial leverage. The good news for AIG was the fact that S&P explained that its stable outlook on core operating companies reflects its belief that the insurer's capital adequacy will remain redundant at the 'AA' level and that the company will be able to sustain its "very strong" competitive position through market leadership and strong product and geographic diversification. Fitch Ratings affirmed AIG Inc's ratings but revised the outlook to stable from positive. Fitch affirmed the Insurer Financial Strength (IFS) ratings of AIG's rated property & casualty insurance subsidiaries at 'A'. Fitch said that it had revised the outlook to stable because of AIG's announced $3.6bn pre-tax charge for adverse development of loss reserves as well plans to return capital to shareholders at levels that "far exceed" prior rating expectations. "Previous upgrade rating triggers disclosed by Fitch relating to profitability and interest coverage will not be met following the reserve charge, and financial leverage will also deteriorate to levels above previous upgrade ratings triggers," explained Fitch. The ratings agency added that reserve development represents 6% of existing reserves and will add more than 10 points to the full year property & casualty calendar year combined ratio, which was 100.6% at nine month 2015. "Continued adverse reserve development adds uncertainty regarding the impact of reserve experience on future performance, and is part of a long-term trend of under-reserving. Fitch believes there are no assurances that reserving issues have been fully addressed by the noted charge," stated Fitch. Of the plan to return at least $25bn of capital to shareholders over the next two years, Fitch said: "This is one of the largest returns of capital relative to existing shareholders equity that Fitch has observed in many years in the insurance industry, and from a credit perspective is viewed by Fitch as aggressive." Bruce Ballentine, Moody's lead analyst for AIG, said that its downgrade reflects "persistent" adverse loss development and "weak" underwriting results, plus the ongoing challenge of setting reserves for long-tail casualty lines. Moody's noted that AIG's decision to take the $3.6bn charge to strengthen its property/casualty loss reserves was "continuing a history of reserve problems that included charges totalling about $7 billion in 2009-10". Moody's added that AIG's underwriting and expense initiatives to bolster its property/casualty profits "will be constrained by increasingly difficult market conditions".

Rating agencies react negatively to AIG’s reserve charges and strategic plan

Want to read this article?

Read Next

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Berkshire Hathaway discloses minority $6.72bn stake in Chubb

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Berkshire Hathaway discloses minority $6.72bn stake in Chubb

Want to read this article?

Read Next

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Berkshire Hathaway discloses minority $6.72bn stake in Chubb

Related Articles